Video: Economic Order Quantity

In this lesson, Nick Palazzolo, CPA, dives into the calculations and conceptual understandings necessary to master the Economic Order Quantity (EOQ). He emphasizes the critical nature of committing a variety of inventory management formulas to memory, noting how vital they are for effectively managing working capital. Through a hands-on approach, Nick walks through the EOQ formula, detailing each component and explaining how it aids in determining the optimal point to reorder inventory, thereby minimizing total inventory costs. Additionally, Nick introduces the concept of Materials Requirements Planning, another inventory management technique, before bringing theory to life with a practical example featuring Pineapple Smoothie Inc. This engaging demonstration showcases how to calculate the EOQ in a real-world scenario, ensuring a clear grasp of how to apply this formula when faced with similar questions.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Now that we had our little intro this session, this lesson is going to consist of me running through so many different formulas and you're going to memorize them all. This is one of the most memorization heavy lessons there are and it's going to be to your benefit. You're going into the exam with all these tools in your tool belt because you never know what tools you're going to need. The best way to be prepared, the best way to just get three points in the exam is to memorize all these formulas. We'll start off with our economic order quantity and as you see here, right, we've got the square root of two times S which is annual sales times O which is cost per purchase order divided by C which is the annual carrying cost per unit.

Now yes, just straight up memorize it. But let's also talk about what it is, why it's important. The economic order quantity method of inventory control anticipates orders at a point where carry costs are nearest to restocking costs. The goal here is to minimize total inventory costs.

So yes, if you are a super inventory heavy company, you have to pay to store that inventory, right? And also you don't want to have to buy new inventory until the last minute when you have to kind of think like adjust in time inventory process because you want to keep as much cash on hand, right? You don't want to have to give up your cash and you don't want to have to pay as much to store your inventory. So this formula tells you when you need to purchase more inventory, when you get to what level of inventory. Pretty important formula, I'd say.

It helps you manage your working capital,

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